Financial Markets Integration of Iran within the Middle East and with the Rest of the World

It is widely argued that Iran’s financial markets are effectively isolated from the rest of the world. To see whether this argument is true and to better understand Iran’s financial development, financial interdependencies of Iran within the Middle East and with the rest of the world are estimated. Monthly financial data from equity, money and foreign exchange markets is applied over 12 years; and integration of each of these markets is analysed in turn. To begin with, testing for stationarity using tests for a unit root in presence of breaks is undertaken. The series are found to contain different orders of integration, a situation that leads to the use an ARDL to test for cointegration. It is found that Iran is not fully integrated nor completely segregated from the rest of the world, thus the question as to whether Iran should be considered as a good choice for international portfolio diversification is controversial.